I first started by covering Xunlei (Nasdaq: XNET) in November of 2017 when the stock was trading at $24.05 and I considered it a short trade that would “reversal soon”. The stock then fell 90%, which is a sharp enough drop that I felt by August of 2022 it had fallen too much and so I’d rate it a Strong Buy based on profitability and cash position. The stock is now up 32% since that call.
Today, at the request of several readers, I’d like to quickly update my stance on the company. Much of what I said in the second article is still generally true, though the specific numbers need an update today.
Xunlei is a Chinese company that is being followed and covered in the US, in part because of this Not much English language information is available to help investors understand the company and its operations. I think the company’s operations are best described in English in its annual publication 20F SEC filing. To wit (with my focus the whole time):
We operate a powerful internet platform in China that relies on cloud technology to enable our users to quickly access, store, manage and consume digital media content on the Internet. In recent years, we have expanded our products and services from computer-based devices to mobile devices in part through Pre-installed acceleration products in mobile phones To expand our user base further and provide our users with a wider range of access points. We offer a wide range of products and services across Cloud acceleration, blockchain, shared cloud computing, and digital entertainment To provide an effective, smart and secure Internet environment.
To address the shortcomings of digital media transmission over the Internet in China, such as low speed and high delivery failure rates, we provide users with quick and easy access to digital media content over the Internet through the core products and services below:
- Xunlei Accelerator, our most popular and free productwhich enables users to speed up digital transmission over the Internet and has approx 48.0 million unique visitors per month in December 2021According to our internal record; And
- Cloud acceleration subscription serviceswhich is delivered through our product, Green Channel, and offers users premium services for speed and reliability.
In addition to our core product, Xunlei Accelerator, we also developed cloud computing and other value-added services for the Internet to accelerate the development of enterprises and keep pace with the latest industry trends and the changing needs of users. These value-added products and services mainly include live streaming services and online gaming serviceswhich provides us with synergies in our business operations.
Our mobile initiatives also benefit from our relationship with Xiaomi, one of our former strategic shareholders. Since 2014, we have entered into pre-installation services agreement with Xiaomi group company which manufactures Xiaomi phones, a famous smartphone brand in China. According to the agreement, we agree to provide the Mobile Xunlei acceleration plug-in, and the mobile phone manufacturer agrees to install this plug-in on their phones for free. This pre-installment arrangement provides mobile users with access to our acceleration services, which we believe enhances our ability to generate more user traffic. The mobile hardware acceleration software has been officially certified by Xiaomi’s operating systems and the software is installed on Xiaomi phones sold in China, including both shipments of new phones and system upgrades from existing Xiaomi phones.
Another key part of our strategies is to continue our innovation in crowdsourcing idle bandwidth capacity and potential storage from users of our cloud computing devices so that we can continually offer computing resources to third parties, such as internet content providers, through our CDN services. We began generating revenue from the sale of collective link capacity that we collected from users of our cloud computing services to third parties in the third quarter of 2015. To further grow our cloud computing business, we launched our decentralized cloud computing product, OneThing Cloud, in 2017. OneThing Cloud is essentially a cloud-based storage and sharing device that allows users to share idle internet bandwidth and storage resources with our content delivery networks. Third-party purchasers of cloud computing services mainly include Internet content providers such as iQiyi and Xiaomi. In 2020, we launched our rewards program, which allows OneThing Cloud users to share dormant uplink capabilities and external storage with us for a small amount of cash rewards.
Latest financial results
As I mentioned in my previous article, XNET has been attractive not only for its cash position (which we’ll get to below) but because its revenue and income are growing. Recent results bear this trend.
From the November 2022 earnings statement, we learn that Q3 revenue grew 12.8 percent sequentially and 47.1 percent year-over-year. This performance was a result of the following numbers in the company’s three reporting segments (my emphasis):
Cloud computing revenue was $29.1 million, an increase of 2.7% sequentially. The increase in cloud computing revenues is mainly due to Increased demand from our major customers For our cloud computing service…
Underwriting revenue was $25.0 million, a decrease of 1.7% from the previous quarter. The number of subscribers reached 4.37 million as of September 30, 2022 compared to 4.46 million as of June 30, 2022…
Revenue from live broadcasts and other IVAS amounted to US$34.2 million, An increase of 39.4% over the previous quarter. It was the main driver behind the increase in streaming revenue and other IVAS revenue Increased users paying for our live streaming products, launched in 2021, and our improved ability to monetize.
This increased revenue (which is a company record) also resulted in a new all-time high in net income for the quarter. The chart below helps visualize this.
In other words, the company is doing very well.
Cash in the box
The company’s performance continued to strengthen its balance sheet, with liquidity and short-term investments again increasing.
With 66.5 million ads pending, the company has about $3.75 ($251 million / $66.5 million) in cash and short-term investments per ad on hand. With the stock trading at $2.12, that’s 178% of the share price. This explains why the company continues to have a significant negative enterprise value ($85.8 million).
Being profitable and having a negative electrical value is a perfect reason to engage in stock buybacks because each purchase accumulates both book value and available cash. The company understands this, hence:
Since approving a $20 million stock repurchase plan in March 2022, as of September 30, 2022, the company has used $4.3 million of it. This is the result:
Given the company’s profitability and very strong cash position, I expect it will continue to buy back its stake, eventually using the full $20 million authorized and possibly following that up with another mandate.
Because it has a negative corporate value, XNET receives an insignificant rating on any metric that includes EV, but in reality all of these metrics are incredibly powerful. Noting this fact, here is an alpha summary of the evaluation metrics.
I believe the rating numbers combined with plenty of cash on hand and growing revenue fully justify the “Strong Buy” rating on XNET. However, Find Alpha does not provide a quantitative ranking for this specific indicator, possibly due to the lack of an analyst covering the company. However, this under cover is another factor that contributes to XNET’s current poor pricing by the market.
XNET trades options but is not particularly liquid. Since my positions were small, I was able to get into the stock via naked puts, and the stock was just called out by the covered calls I wrote against my put. I may try to replicate this strategy in the future.
The risks here are twofold, first, the failure of the company to implement it, and second, the same risk that I outlined in my previous article:
The biggest risk with XNET, in my opinion, is the same one that plagues most Chinese stocks, i.e. the company is VIE and so the shareholders don’t actually own the company. Here is a good link describing this risk.
These risks, in my opinion, are mitigated to some extent by XNET’s net cash position and increased revenue and income. However, as with all Chinese stocks, I took a much smaller position with this name than I would have in the US.
Summary and trading plan
I think XNET is currently presenting us with a buying opportunity that arises primarily because the company is under-watch and is little known. There are no Wall Street analysts, it is difficult to collect public information (in English), and you do not need financing. But all of that can be an advantage for small investors. My position has recently been called out, but I plan to go back into the stock, maybe buy a little bit at today’s prices but then try to get a full position if the stock trades below $1.75 (which is just above short-term resistance).